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Chart types - Trade forex with different charts

Technical Analysts usually use the price charts for operating in a range of commodity and financial markets for many years now. In the forex market, traders usually determine the exchange of a specific currency pair as it changes over time. The traders usually do this by the type of the forex chart they use.

However, different technical analysts favor to refer different chart types, which usually depend on their particular intended purposes. However, most charting software that are proposed to be used forex traders includes all or some specific chart types which are discussed in the sections followed.

The simplest definition of a Chart is that, it is a graphical explanation of currency price movements in a particular period of time. The two most important factors in a forex chart are the X & Y axis. The X axis reflects the Time whereas the Y axis reflects the Price.

There are usually 4 types of Forex Charts:

1. Line Chart
2. Bar Chart
3. CandleStick Chart
4. Point and Figure Charts

Line Chart

Line chart reflects a sequence of data points that are linked together in line. The most commonly used data is the closing price as it is considered as the vital feed in forex. Line charts is one of the essential tyoes of chart used in most of the financial studies and forex also.

Line charts are the same like tic charts. The only difference is that the line charts allows the traders to plot the action for very long time frames as every tic cannot be plotted.

If the traders are considering the line charts for technical analysis, they might plot the exchange rates from open to open or close to close, etc. They would typically do so for each of the period that they might be interested in analyzing, so as to determine the market situation from several different times frames.

Generally, this procedure helps to smoothen the price action in line charts significantly related to be seen in the tic charts, which helps the traders to better understand the market trends.

Bar Chart

Bar Chart provides detailed information when compared to the Line Chart. In not only shows the closing price but also reflects the lowest price, highest price and opening price during a particular time frame. For instance, if you are using a 5 minutes chart, it reflects all the price fluctuations during that 5 minutes.

For the forex traders, Bar Charts are one of the popular chart types that they use. These also provide significantly more information when compared to simple line charts. Bar charts are also known as Open, High, Low and Closing chart or OHLC chart.

Normally, the bar charts consist of bars or lines which pull out vertically beween the low and the high period to demonstrate the limits of the trading range for that particular time frame.

Furthermore, the bars have small vertical hashes or lines that reflect the appropriate closing price on the right and opening price on the left for each plotted period.

CandleStick Chart

Candlestick charts have the same characteristics of bar charts as they provide open, high, low, and close prices within one bar, but the main difference is the ease of interpretation purpose. We can easily interpret bullish and bearish pattern from the color of their bodies.

Opening and closing price makes up the body of the candlestick. When the opening price is lower from the closing price the body is left blank or white. When the opening price is higher from the closing price the body is filled with color (this color depends on the trading platform).

Upper shadows shows the high of the price and lower shadow shows the low of the price for the time span the trader selected in his chart.

Candlestick charts tend to exhibit a large set of well defined patterns, often with colorful Japanese names, that knowledgeable forex traders can use to forecast future exchange rate movements.

These candlestick patterns can involve one or more candles, and they usually tend to fall into the categories of bullish or bearish continuation or reversal patterns.

Point and Figure Charts

Another interest chart type is the so-called Point and Figure chart. This type of chart seems especially popular among professional forex traders who often create them by hand as they observe exchange rates move.

These special charts have the unique characteristic of focusing solely on price action. As a result, they help traders remove the sometimes distracting element of time from the plotted image and resulting analysis.

In general, moves on Point and Figure charts will be plotted in columns of X's if they are rising, or in O's if they are falling. Furthermore, each box on these charts has a certain Box Size or Point that is often defined as 30 pips for the major currencies, and only price reversals of a set size known as the Reversal Amount will be plotted.

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High Low Breakout Technique

This technique can be used for any market that has a decent daily range. If you look at any chart, what do you see? You should see a succession of bars that are doing one of three things.

1. Going up
2. Going down
3. Going sideways

Unless today's bar turns out to be an inside day or very rarely the high and low of today are exactly the same as the high and low as yesterday, then we will have a new high or low.

Think about it. Today's bar, in all probability will make a higher high than yesterday's bar or a lower low than yesterday's bar. This information is very powerful.

For example, company XYZ had a range of 200 points (high minus the low) yesterday. Today the high might be 50 points higher than yesterday's bar or 50 points lower than yesterday's bar. If we can find the average daily distance between the high of yesterday's bar to the high of today's bar and the average daily distance between the low of yesterday's bar and the low of today's bar, then we might have a trading opportunity.

Make yourself a little excel sheet or grab a pen and paper and start tracking the high and lows of each day. Then deduct the high of today from yesterday's high and the low of today from yesterday's low. After you have a few days worth of data you can get an average. On the excel sheet, below the first five columns are the date, open, high, low and close. "DR" is daily range, "TH-YH" is today's high minus yesterday's high and "YL-TL" is yesterday's low minus today's low. In the "TH-YH" column, I only record an entry if today's high is greater than yesterday's high and in the "YL-TL" I only record an entry if today's low is lower than yesterday's low. All pretty simple stuff.

OK, as you can see, the example of the GBP/USD (Pound/Dollar). The average breakout up was 54 pips and the average breakout down was 60 pips. The next thing to do is apply this knowledge to our trading.

On the 2nd September the high was 1.7972 and the low was 1.7864. We are looking for a breakout of either of these points. It doesn't matter which way. So on the 3rd September you mark the previous day's high and low and monitor what happens when it reaches these points.

The way I trade this setup is to wait for the market to test the low or high of the previous day and then pullback. I don't enter on a break of the previous day's high/low, I wait for a pullback of either a test of the high/low or a break of the high/low.

As you can see from the chart, the market came down and tested the low of 1.7864 and then pulled back. The low that was made was just a few pips lower than the previous day's low and formed a little support area. That support area is the breakout point. You can place an entry order a couple of pips below the support area with a target of the average "YL-TL" as a target, which in this case was 60 pips. The stop is a bit more tricky. If the pullback is not too big you can place your stop just above the pullback area (resistance). If the distance is too great, then just use Dollar stop.

You can even take this down to a 1 minute chart and scalp the market with a very tight stop. There are loads of ways to trade this setup. You could add some indicators for confirmation. You could use the entry as setup for a position trade. You could even concentrate on inside day's where the breakout might have a much larger range. However you decide to trade it, at least take note of the previous day's high and low.

About the Author

Martin Chandra is a full-time investor. He has been researching investment strategies and make his own living. For more information please go to here.

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